Type of Submission

Refereed Article


This study aimed to examine whether an optimal investment level exists in hotel firms. The authors examined the quadratic relation between investments and hotel firm value. The results show that there is an optimal investment level that maximizes firm value. However, the optimal investment level varies across firms on the basis of the quality of investment opportunities or under- and over investment problems. The optimal investment level is higher for hotel firms with under investment problems, which suggests that these firms have valuable investment opportunities. However, the optimal investment level is lower for hotel firms with over investment problems, which implies that shareholders of these firms perceive additional investments to be value destroying. These results support the postulations of the Q theory of investment, pecking order theory, and free cash flow theory. Practical implications are discussed in the realm of financing, investment, and dividend policies.